METAPHOR 1: THE CORPORATION AS A “PERSON” Author and reporter William Greider describes the development of corporate “personalities”: “ The great project of corporate lawyers, extending over generations, has been to establish full citizenship for their business organizations. They argue that their companies are entitled to the same political rights, save voting, that the Constitution guarantees to people. In 1886 the Supreme Court declared, without hearing arguments, that corporations would henceforth be considered “persons” for purposes of the 14th Amendment, the “due process” amendment that was established to protect the newly emancipated black slaves after the Civil War. Fifty years later, justice Hugo Black reviewed the Supreme Court’s many decisions applying the 14th Amendment and observed that less than one half of one percent invoked it in protection of the Negro race, and more than 50 percent asked that its benefits be extended to corporations… In the modern era of regulation [corporate lawyers] are invoking the Bill of Rights to protect their organizations from federal laws…Corporations, in other words, claim to be “citizens” of the Republic, not simply for propaganda or good public relations, but in the actual legal sense of claiming constitutional rights and protections…Whatever legal theories may eventually develop around this question, the political implications are profound. If corporations are citizens, then other citizens – the living, breathing kind – necessarily become less important to the processes of self-government.7”
METAPHOR 2 : THE CORPORATION AS A COMPLEX ADAPTIVE SYSTEM The corporate structure was designed to be so vital and robust that it was like an “externalizing machine.” It is set up to do whatever it can to hang on to its earnings and push its costs off of its balance sheet. That is what led to the notorious “special purpose entities” at Enron. This can also be done, for example, through legislation that increases barriers to entry for its competitors or limits its liabilities. The self-perpetuating life force built into the corporate structure fights the systems intended to impose accountability and, through that, legitimacy. “Externality” is the vocabulary of economics. Another way to think about this is to use the vocabulary of science and call it a “complex adaptive system.” Only when one understands that corporations have adaptive characteristics does it become clear that modification of their behavior must come from within the organizations. For decades, it seemed convenient to ignore the gulf between the theory and reality of corporate accountability. Textbooks and judges spoke cheerfully of the shareholders’ ability to provide oversight by selling the stock, filing a lawsuit, or electing new directors. For example, an article written by Judge Frank H. Easterbrook and law professor Daniel R. Fischel points to mandatory corporate governance provisions to support their argument that these rules provide a solid foundation for real (and informed) freedom of choice for investors. They go on to acknowledge that, “Determined investors and managers can get ‘round’ many of these rules, but accommodation is a sidelight. Throughout this book, there are examples of “get(ting) ‘round”’ these rules. It does not mean much to “forbid perpetual directorships” if management continues to renominate the same people. The Stone & Webster case study includes a director who served on its board for half a century. The General Motors case study reveals that the GM board, in the middle of the company’s troubles in 1992, had one member who had been on the board for 20 years, and two who had served for 15. Requiring the approval of a third of the board or half the shareholders does not mean much if the board is entirely selected by and beholden to management and the shareholders do not have the ability to overcome the obstacle of collective choice to make informed decisions. (See chapters 2 and 3 for further discussion of these issues, as well as the “duty of loyalty,” the one share, one vote issue, and the relevance of required disclosures.) As we will see throughout this book, neither government nor marketplace have consistently succeeded in requiring corporate functioning to conform to society’s interests over the long term. Large corporations have huge bank accounts to retain the services of the most talented professionals, including the most persuasive lobbyists and lawyers, with very persuasive war chests. They even control their own shareholders: the corporations themselves are the largest investors through their pension funds, often the greatest asset and liability even a major corporation has on its balance sheet. For example, according to a Fortune magazine article by Carol Loomis: “in 2005, General Motor’s pension assets totaled $90 billion, were overfunded by $6 billion, and earned a robust $10.9 billion return, just slightly more than the losses of its operating divisions. One investor joked that General Motors is a pension liability with a car company attached. (He should have mentioned the healthcare liability, which is underfunded by as much as $61 billion.)” And of course the mainstream media and journalistic outlets are controlled by corporations as well. The issue of where and how meaningful accountability can be imposed is the central challenge of governance systems. The rest of this chapter discusses attempts at external mechanisms for limiting the ability of corporate executives to benefit themselves to the detriment of the providers of capital. In economic terms, that would mean to limit their ability to externalize their costs. In public policy or legal terms, we might say, to make them behave in a way that is socially acceptable, even moral..
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